 "Trade, trade deals")
Recent moves by central banks to increase the gold component in their foreign exchange reserves, along with efforts by countries like China and India to internationalise their local currencies, and the recent US move to slap tariff hike on Chinese electric vehicles and other products, are intensifying the fragmentation of international trade and driving up its costs.
Some believe that the world is witnessing initial signs of the Cold War in terms of trade fragmentation. If that’s the case, what role can India, as one of the leaders of the former non-aligned movement, play in reducing the costs of global trade and resolving conflicts between blocs?
For instance, the Deputy Managing Director of International Monetary Fund (IMF) Gita Gopinath finds similarities between trade fragmentation now and initial years of the erstwhile Cold War era.
“Thus far, today’s fragmentation is not significantly different from the initial years of the Cold War,” she said in her speech at the Stanford Institute for Economic Policy Research recently.
However, she noted that the fragmentation is quite smaller than the average “between-bloc trade shortfall” during the entire Cold War period.
Trade between the rival Western and Eastern blocs was significantly depressed during the Cold War, relative to trade within these blocs, she recalled.
It should be noted that her speech was delivered days before the US hiked tariffs on imports of Chinese electric vehicles, solar cells, certain aluminium and steel products and specific medical products. This may affect $18 billion worth of imports to the US from China.
Gopinath also observed that non-aligned countries have greater economic and diplomatic heft now and are much more integrated into the global economy than during the Cold War years.
“Their role as connectors this time round can help attenuate some of the costs of fragmentation,” she felt.
Two emerging blocs are led by the US and China although the dynamics are not as clear-cut as during the Cold War era. As far as the role of India is concerned in reducing costs of trade and fragmentation of global trade, the economy is itself looking at protecting its own domestic turf.
Unlike the Cold War era, India has grievances against one of the leaders of two emerging blocs – China. Even then, it is not able to decouple its economy from that of China.
Trade balance dynamics
So, how can then India play that role in terms of economic integration as Gopinath pointed out and also in terms of resolving political conflicts?
If one looks at merchandise exports of India, the US is still the largest partner of India. It had almost 18 per cent share in India’s total goods exports against China’s at just around four per cent in 2023-24. While US share in India’s exports hovered around 17-18 per cent that of China moved around three-seven per cent during the past five years.
It was India’s imports that made China a formidable trading partner. While US share in India’s imports was just around six per cent that of China was 15 per cent during 2023-24, making Beijing the biggest trading partner, piping Washington.
Share of India’s imports ranged around 6-7.5 per cent, while that of China was between 14 to 16.5 per cent during the past five years.
This clearly showed that despite India’s moves to be cautious about Chinese imports, the economy is too dependent on them. This also gave rise to a huge trade deficit with China at $85.08 billion during 2023-24 against a $36.74 trade surplus with the US. India kept up trade surplus with the US and trade deficit with China during the past five years.
Trade dependency realities
Biswajit Dhar, distinguished professor at the Council for Social Development, says India is trying to decouple from China as is evidenced by its move to introduce production linked incentive (PLI) scheme. All the sectors that have been selected for PLI are the ones where India’s imports from China are really high, be it pharma, mobile phones, auto components or electronics.
However, in reality, India is getting more connected to China, he says. “Year after year our imports from China are going up,” he points out. The data cited above gives credence to Dhar’s observation.
Dhar says there is no way India is going to reduce its dependence on China in the near future. “In four years, PLI has not taken off in a big way. Now, the government has been saying that they are going to review it,” he says to buttress his point of view.
Will the close proximity of India with China so far as imports by New Delhi are concerned pave the way for the country to play the role of connector in global trade, as Gopinath suggested or in resolving political conflicts?
Shyam Sharan, former foreign secretary and an honorary fellow, Centre for Policy Research, feels that India unfortunately does not fit anywhere.
“By not signing the RCEP (The Regional Comprehensive Economic Partnership), the biggest trading arrangement in Asia, we have marginalised ourselves.”
He says the argument given by India that Chinese imports will flood Indian markets if it becomes part of the RCEP is not valid since no rules are being followed by Beijing in its trade with India.
“China has not subjected itself to any rules. By being part of RCEP, China would at least to some extent have to subject itself to rules and norms adopted by the common consent of the RCEP members. This route is not available to us now,” he says.
Global trade and partnerships
Despite not joining the RCEP, China is your largest trade partner, Sharan points out, adding, “So, what have we achieved?”
He points out that China does not subject itself to any rules, say on the matters relating to subsidies. “How many anti-dumping duties can you impose?” he wonders.
Dhar says India has its own priority in global trade.
He cites an instance of the Chabahar deal that India supported despite the US threatening it with sanctions which are not veiled threats.
“Despite Ukraine, we backed Russia. Despite the US, we are backing Iran (in terms of the Chabahar deal),” he says, pointing out that these equations are not clear.
When it comes to the resolution of political conflicts, Sharan says India is quite marginal in that respect.
To a query that Prime Minister Narendra Modi did tell Russian president Vladimir Putin that this is not the era of war which is considered a diplomatic master stroke, Sharan responds, “We can make statements like we have done on the Russia-Ukraine war. But, what difference has it made? We can claim that we played some role, but there is not much evidence of that.”
He does not think that India should exaggerate its influence. “That is not to say that India does not have international influence, but we are not seen as a critical player in our ability to mediate in situations of wars like in West Asia and in Ukraine,” he sounds a word of caution.
He says India has to keep in mind that while its macroeconomic fundamentals may be greater than many economies since it is the fifth largest economy, it is not closely connected with the global or regional economy.
“By talking about atma nirbhar bharat (self-reliant India), we have limited our global or regional presence,” he observes.
Saran observes that Singapore has more leeway in playing the role of economic connector despite being a much smaller economy than India’s since the former is more economically integrated with the rest of the world.
Internationalisation of currency
Saran also did not agree with Gopinath that recent moves by central banks to buy gold and efforts to internationalise currencies by India and China are reminiscent of the initial days of the Cold War era in terms of fragmentation of trade.
This may become a major issue later but look at the facts today, he says. “It is true that China is trying to internationalise Yuan, it is trying to diversify its currency reserves. The Chinese central bank is buying more gold. What they are trying to do is to diversify their reserves from their excessive dependence on dollars,” he says.
China has also set up its China International Payments System (CIPS) as an alternative to the US-led SWIFT (The Society for Worldwide Interbank Financial Telecommunications) system.
But CIPS relies very much on its MoU with SWIFT. Even though CIPS has seen an increase in international payments particularly because Russia is conducting its trade in Yuan, it is nowhere near what is handled by SWIFT.
Saran says the US dollar reigns supreme because it is convertible both on current account and capital account and the US treasury market is liquid.
As long as Yuan is not convertible on capital account, it is very difficult to see how it could pose any kind of competition to the dollar in any foreseeable future, Saran says.
As far as Indian efforts at making rupee acceptable for payments are concerned, the country has to accept the fact that in reality, it is dollar dependent, he says.
“You don’t have any kind of significant alternative system in place. Even, for example, you were trying to buy Russian oil, the Russians were demanding payment in Yuan,” Saran points out.
While India tried the rupee trade system, Russians did not want it.
“When Sergey Lavrov (Russian foreign minister) came to India, he said we can't keep accumulating the rupee balances because we don't have enough import baskets with respect to India,” Saran points out.
